Euro zone bond yields dive as Draghi comments feed QE speculation

* Greece plans to sell three-, five-year bonds in next two
weeks
(Updates with German Ifo, new comments)

By Marius Zaharia

LONDON, Aug 25 Yields on most euro zone
government bonds hit record lows on Monday as speculation grew
that the European Central Bank was preparing a big programme of
asset purchases to counter wilting inflation.

In stronger language than he has used in the past, European
Central Bank President Mario Draghi said on Friday at an annual
meeting of central bankers in Jackson Hole, Wyoming, that the
ECB was prepared to respond with all its "available" tools
should inflation drop further.

This increased speculation the ECB could embark on a
large-scale asset-buying scheme known as quantitative easing, or
QE, to pump cash into the financial system and revive inflation.

"For sure Draghi sounded a little bit more open to doing
more," said Jean-Francois Robin, global head of strategy at
Natixis. "The market is clearly buying the ... idea of QE."

German 10-year yields fell 6 basis points to a
record low of 0.93 percent. The moves may have been exacerbated
by the thin trading volumes caused by a bank holiday in London
and could partially reverse on Tuesday, analysts said.

French yields fell 8 bps to 1.30 percent, with
the market shrugging off news that the government resigned.
President Francois Hollande's office said a new government would
be formed on Tuesday.

"There are no real implications from that on the market
because the market is in QE mood," said Alessandro Giansanti,
senior rate strategist at ING. "The ECB doesn't have any other
option left."

DANGER ZONE

The ECB cut all its interest rates in June and flagged
measures to pump up to 1 trillion euros into the sluggish euro
zone economy by offering cheap long-term loans to banks.

The ECB has been struggling for months to lift inflation out
of what it calls a "danger zone" of sub-1 percent. Euro zone
consumer prices grew 0.4 percent in July and are expected to
post 0.3 percent growth in August on Friday, a far cry from the
ECB's target of just below 2 percent.

Adding to the lacklustre euro zone picture, Germany's Ifo
business sentiment index dropped for a fourth straight month in
August due to concerns about the Ukraine crisis and the impact
of the sanctions and countersanctions Russia and the West
imposed on each other.

Despite the deteriorating economic outlook, investors
grabbed even the higher-risk bonds in the currency union. The
higher probability of QE means that they can hope to sell the
bonds to the ECB for a profit.

Taking advantage of the renewed demand, Greece aims to
reopen its recent three- and five-year bond issues in the next
two weeks to raise as much as 1.5 billion euros. But it will
take T-bills as payment instead of cash.

"(Draghi's) comments are likely to keep alive the hopes that
the ECB adds more stimulus measures to push the inflation
expectations back upwards," said Suvi Kosonen, an analyst at
Nordea.
(Reporting by Marius Zaharia, editing by Nigel Stephenson and
Hugh Lawson)

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